Foreign Trade and Global Economic Policies

U.S. foreign trade and global economic policies have changed
direction dramatically during the more than two centuries that the
United States has been a country. In the early days of the nation's
history, government and business mostly concentrated on developing the
domestic economy irrespective of what went on abroad. But since the
Great Depression of the 1930s and World War II, the country generally
has sought to reduce trade barriers and coordinate the world economic
system. This commitment to free trade has both economic and political
roots; the United States increasingly has come to see open trade as a
means not only of advancing its own economic interests but also as a key
to building peaceful relations among nations.
The United States dominated many export
markets for much of the postwar period -- a result of its inherent
economic strengths, the fact that its industrial machine was untouched
by war, and American advances in technology and manufacturing
techniques. By the 1970s, though, the gap between the United States' and
other countries' export competitiveness was narrowing. What's more, oil
price shocks, worldwide recession, and increases in the foreign exchange
value of the dollar all combined during the 1970s to hurt the U.S. trade
balance. U.S. trade deficits grew larger still in the 1980s and 1990s as
the American appetite for foreign goods consistently outstripped demand
for American goods in other countries. This reflected both the tendency
of Americans to consume more and save less than people in Europe and
Japan and the fact that the American economy was growing much faster
during this period than Europe or economically troubled Japan.
Mounting trade deficits reduced political
support in the U.S. Congress for trade liberalization in the 1980s and
1990s. Lawmakers considered a wide range of protectionist proposals
during these years, many of them from American industries that faced
increasingly effective competition from other countries. Congress also
grew reluctant to give the president a free hand to negotiate new trade
liberalization agreements with other countries. On top of that, the end
of the Cold War saw Americans impose a number of trade sanctions against
nations that it believed were violating acceptable norms of behavior
concerning human rights, terrorism, narcotics trafficking, and the
development of weapons of mass destruction.
Despite these setbacks to free trade, the
United States continued to advance trade liberalization in international
negotiations in the 1990s, ratifying a North American Free Trade
Agreement (NAFTA), completing the so-called Uruguay Round of
multilateral trade negotiations, and joining in multilateral agreements
that established international rules for protecting intellectual
property and for trade in financial and basic telecommunications
services.
Still, at the end of the 1990s, the future
direction of U.S. trade policy was uncertain. Officially, the nation
remained committed to free trade as it pursued a new round of
multilateral trade negotiations; worked to develop regional trade
liberalization agreements involving Europe, Latin America, and Asia; and
sought to resolve bilateral trade disputes with various other nations.
But political support for such policies appeared questionable. That did
not mean, however, that the United States was about to withdraw from the
global economy. Several financial crises, especially one that rocked
Asia in the late 1990s, demonstrated the increased interdependence of
global financial markets. As the United States and other nations worked
to develop tools for addressing or preventing such crises, they found
themselves looking at reform ideas that would require increased
international coordination and cooperation in the years ahead.

From Protectionism to Liberalized Trade

The United States has not always been a forceful advocate of free
trade. At times in its history, the country has had a strong impulse
toward economic protectionism (the practice of using tariffs or quotas
to limit imports of foreign goods in order to protect native industry).
At the beginning of the republic, for instance, statesman Alexander
Hamilton advocated a protective tariff to encourage American industrial
development -- advice the country largely followed. U.S. protectionism
peaked in 1930 with the enactment of the Smoot-Hawley Act, which sharply
increased U.S. tariffs. The act, which quickly led to foreign
retaliation, contributed significantly to the economic crisis that
gripped the United States and much of the world during the 1930s.
The U.S. approach to trade policy since
1934 has been a direct outgrowth of the unhappy experiences surrounding
the Smoot-Hawley Act. In 1934, Congress enacted the Trade Agreements Act
of 1934, which provided the basic legislative mandate to cut U.S.
tariffs. "Nations cannot produce on a level to sustain their people
and well-being unless they have reasonable opportunities to trade with
one another," explained then-Secretary of State Cordell Hull.
"The principles underlying the Trade Agreements Program are
therefore an indispensable cornerstone for the edifice of peace."
Following World War II, many U.S. leaders
argued that the domestic stability and continuing loyalty of U.S. allies
would depend on their economic recovery. U.S. aid was important to this
recovery, but these nations also needed export markets -- particularly
the huge U.S. market -- in order to regain economic independence and
achieve economic growth. The United States supported trade
liberalization and was instrumental in the creation of the General
Agreement on Tariffs and Trade (GATT), an international code of tariff
and trade rules that was signed by 23 countries in 1947. By the end of
the 1980s, more than 90 countries had joined the agreement.
In addition to setting codes of conduct
for international trade, GATT sponsored several rounds of multilateral
trade negotiations, and the United States participated actively in each
of them, often taking a leadership role. The Uruguay Round, so named
because it was launched at talks in Punta del Este, Uruguay, liberalized
trade further in the 1990s.

American Trade Principles and Practice

The United States believes in a system of open trade subject to the
rule of law. Since World War II, American presidents have argued that
engagement in world trade offers American producers access to large
foreign markets and gives American consumers a wider choice of products
to buy. More recently, America's leaders have noted that competition
from foreign producers also helps keep prices down for numerous goods,
thereby reducing pressures from inflation.
Americans contend that free trade benefits
other nations as well. Economists have long argued that trade allows
nations to concentrate on producing the goods and services they can make
most efficiently -- thereby increasing the overall productive capacity
of the entire community of nations. What's more, Americans are convinced
that trade promotes economic growth, social stability, and democracy in
individual countries and that it advances world prosperity, the rule of
law, and peace in international relations.
An open trading system requires that
countries allow fair and nondiscriminatory access to each other's
markets. To that end, the United States is willing to grant countries
favorable access to its markets if they reciprocate by reducing their
own trade barriers, either as part of multilateral or bilateral
agreements. While efforts to liberalize trade traditionally focused on
reducing tariffs and certain nontariff barriers to trade, in recent
years they have come to include other matters as well. Americans argue,
for instance, that every nation's trade laws and practices should be
transparent -- that is, everybody should know the rules and have an
equal chance to compete. The United States and members of the
Organization for Economic Cooperation and Development (OECD) took a step
toward greater transparency in the 1990s by agreeing to outlaw the
practice of bribing foreign government officials to gain a trade
advantage.
The United States also frequently urges
foreign countries to deregulate their industries and to take steps to
ensure that remaining regulations are transparent, do not discriminate
against foreign companies, and are consistent with international
practices. American interest in deregulation arises in part out of
concern that some countries may use regulation as an indirect tool to
keep exports from entering their markets.
The administration of President Bill
Clinton (1993-2001) added another dimension to U.S. trade policy. It
contend that countries should adhere to minimum labor and environmental
standards. In part, Americans take this stance because they worry that
America's own relatively high labor and environmental standards could
drive up the cost of American-made goods, making it difficult for
domestic industries to compete with less-regulated companies from other
countries. But Americans also argue that citizens of other countries
will not receive the benefits of free trade if their employers exploit
workers or damage the environment in an effort to compete more
effectively in international markets.
The Clinton administration raised these
issues in the early 1990s when it insisted that Canada and Mexico sign
side agreements pledging to enforce environmental laws and labor
standards in return for American ratification of NAFTA. Under President
Clinton, the United States also worked with the International Labor
Organization to help developing countries adopt measures to ensure safe
workplaces and basic workers' rights, and it financed programs to reduce
child labor in a number of developing countries. Still, efforts by the
Clinton administration to link trade agreements to environmental
protection and labor-standards measures remain controversial in other
countries and even within the United States.
Despite general adherence to the
principles of nondiscrimination, the United States has joined certain
preferential trade arrangements. The U.S. Generalized System of
Preferences program, for instance, seeks to promote economic development
in poorer countries by providing duty-free treatment for certain goods
that these countries export to the United States; the preferences cease
when producers of a product no longer need assistance to compete in the
U.S. market. Another preferential program, the Caribbean Basin
Initiative, seeks to help an economically struggling region that is
considered politically important to the United States; it gives
duty-free treatment to all imports to the United States from the
Caribbean area except textiles, some leather goods, sugar, and petroleum
products.
The United States sometimes departs from
its general policy of promoting free trade for political purposes,
restricting imports to countries that are thought to violate human
rights, support terrorism, tolerate narcotics trafficking, or pose a
threat to international peace. Among the countries that have been
subject to such trade restrictions are Burma, Cuba, Iran, Iraq, Libya,
North Korea, Sudan, and Syria. But in 2000, the United States repealed a
1974 law that had required Congress to vote annually whether to extend
"normal trade relations" to China. The step, which removed a
major source of friction in U.S.-China relations, marked a milestone in
China's quest for membership in the World Trade Organization.
There is nothing new about the United
States imposing trade sanctions to promote political objectives.
Americans have used sanctions and export controls since the days of the
American Revolution, well over 200 years ago. But the practice has
increased since the end of the Cold War. Still, Congress and federal
agencies hotly debate whether trade policy is an effective device to
further foreign policy objectives.

Multilateralism, Regionalism, and Bilateralism

One other principle the United States traditionally has followed in
the trade arena is multilateralism. For many years, it was the basis for
U.S. participation and leadership in successive rounds of international
trade negotiations. The Trade Expansion Act of 1962, which authorized
the so-called Kennedy Round of trade negotiations, culminated with an
agreement by 53 nations accounting for 80 percent of international trade
to cut tariffs by an average of 35 percent. In 1979, as a result of the
success of the Tokyo Round, the United States and approximately 100
other nations agreed to further tariff reductions and to the reduction
of such nontariff barriers to trade as quotas and licensing
requirements.
A more recent set of multilateral
negotiations, the Uruguay Round, was launched in September 1986 and
concluded almost 10 years later with an agreement to reduce industrial
tariff and nontariff barriers further, cut some agricultural tariffs and
subsidies, and provide new protections to intellectual property. Perhaps
most significantly, the Uruguay Round led to creation of the World Trade
Organization, a new, binding mechanism for settling international trade
disputes. By the end of 1998, the United States itself had filed 42
complaints about unfair trade practices with the WTO, and numerous other
countries filed additional ones -- including some against the United
States.
Despite its commitment to multilateralism,
the United States in recent years also has pursued regional and
bilateral trade agreements, partly because narrower pacts are easier to
negotiate and often can lay the groundwork for larger accords. The first
free trade agreement entered into by the United States, the U.S.-Israel
Free Trade Area Agreement, took effect in 1985, and the second, the
U.S.-Canada Free Trade Agreement, took effect in 1989. The latter pact
led to the North American Free Trade Agreement in 1993, which brought
the United States, Canada, and Mexico together in a trade accord that
covered nearly 400 million people who collectively produce some $8.5
trillion in goods and services.
Geographic proximity has fostered vigorous
trade between the United States, Canada and Mexico. As a result of
NAFTA, the average Mexican tariff on American goods dropped from 10
percent to 1.68 percent, and the average U.S. tariff on Mexican goods
fell from 4 percent to 0.46 percent. Of particular importance to
Americans, the agreement included some protections for American owners
of patents, copyrights, trademarks, and trade secrets; Americans in
recent years have grown increasingly concerned about piracy and
counterfeiting of U.S. products ranging from computer software and
motion pictures to pharmaceutical and chemical products.

Current U.S. Trade Agenda

Despite some successes, efforts to liberalize world trade still face
formidable obstacles. Trade barriers remain high, especially in the
service and agricultural sectors, where American producers are
especially competitive. The Uruguay Round addressed some service-trade
issues, but it left trade barriers involving roughly 20 segments of the
service sector for subsequent negotiations. Meanwhile, rapid changes in
science and technology are giving rise to new trade issues. American
agricultural exporters are increasingly frustrated, for instance, by
European rules against use of genetically altered organisms, which are
growing increasingly prevalent in the United States.
The emergence of electronic commerce also
is opening a whole new set of trade issues. In 1998, ministers of the
World Trade Organization issued a declaration that countries should not
interfere with electronic commerce by imposing duties on electronic
transmissions, but many issues remain unresolved. The United States
would like to make the Internet a tariff-free zone, ensure competitive
telecommunications markets around the world, and establish global
protections for intellectual property in digital products.
President Clinton called for a new round
of world trade negotiations, although his hopes suffered a setback when
negotiators failed to agree on the idea at a meeting held in late 1999
in Seattle, Washington. Still, the United States hopes for a new
international agreement that would strengthen the World Trade
Organization by making its procedures more transparent. The American
government also wants to negotiate further reductions in trade barriers
affecting agricultural products; currently the United States exports the
output of one out of every three hectares of its farmland. Other
American objectives include more liberalization of trade in services,
greater protections for intellectual property, a new round of reductions
in tariff and nontariff trade barriers for industrial goods, and
progress toward establishing internationally recognized labor standards.
Even as it holds high hopes for a new
round of multilateral trade talks, the United States is pursuing new
regional trade agreements. High on its agenda is a Free Trade Agreement
of the Americas, which essentially would make the entire Western
Hemisphere (except for Cuba) a free-trade zone; negotiations for such a
pact began in 1994, with a goal of completing talks by 2005. The United
States also is seeking trade liberalization agreements with Asian
countries through the Asia-Pacific Economic Cooperation (APEC) forum;
APEC members reached an agreement on information technology in the late
1990s.
Separately, Americans are discussing
U.S.-Europe trade issues in the Transatlantic Economic Partnership. And
the United States hopes to increase its trade with Africa, too. A 1997
program called the Partnership for Economic Growth and Opportunity for
Africa aims to increase U.S. market access for imports from sub-Saharan
countries, provide U.S. backing to private sector development in Africa,
support regional economic integration within Africa, and
institutionalize government-to-government dialogue on trade via an
annual U.S.-Africa forum.
Meanwhile, the United States continues to
seek resolution to specific trade issues involving individual countries.
Its trade relations with Japan have been troubled since at least the
1970s, and at the end of the 1990s, Americans continued to be concerned
about Japanese barriers to a variety of U.S. imports, including
agricultural goods and autos and auto parts. Americans also complained
that Japan was exporting steel into the United States at below-market
prices (a practice known as dumping), and the American government
continued to press Japan to deregulate various sectors of its economy,
including telecommunications, housing, financial services, medical
devices, and pharmaceutical products.
Americans also were pursuing specific
trade concerns with other countries, including Canada, Mexico, and
China. In the 1990s, the U.S. trade deficit with China grew to exceed
even the American trade gap with Japan. From the American perspective,
China represents an enormous potential export market but one that is
particularly difficult to penetrate. In November 1999, the two countries
took what American officials believed was a major step toward closer
trade relations when they reached a trade agreement that would bring
China formally into the WTO. As part of the accord, which was negotiated
over 13 years, China agreed to a series of market-opening and reform
measures; it pledged, for instance, to let U.S. companies finance car
purchases in China, own up to 50 percent of the shares of Chinese
telecommunications companies, and sell insurance policies. China also
agreed to reduce agricultural tariffs, move to end state export
subsidies, and takes steps to prevent piracy of intellectual property
such as computer software and movies. The United States subsequently
agreed, in 2000, to normalize trade relations with China, ending a
politically charged requirement that Congress vote annually on whether
to allow favorable trade terms with Beijing.
Despite this widespread effort to
liberalize trade, political opposition to trade liberalization was
growing in Congress at the end of the century. Although Congress had
ratified NAFTA, the pact continued to draw criticism from some sectors
and politicians who saw it as unfair.
What's more, Congress refused to give the
president special negotiating authority seen as essential to
successfully reaching new trade agreements. Trade pacts like NAFTA were
negotiated under "fast-track" procedures in which Congress
relinquished some of its authority by promising to vote on ratification
within a specified period of time and by pledging to refrain from
seeking to amend the proposed treaty. Foreign trade officials were
reluctant to negotiate with the United States -- and risk political
opposition within their own countries -- without fast-track arrangements
in place in the United States. In the absence of fast-track procedures,
American efforts to advance the Free Trade Agreement of the Americas and
to expand NAFTA to include Chile languished, and further progress on
other trade liberalization measures appeared in doubt.

The U.S. Trade Deficit

At the end of the 20th century, a growing trade deficit contributed
to American ambivalence about trade liberalization. The United States
had experienced trade surpluses during most of the years following World
War II. But oil price shocks in 1973-1974 and 1979-1980 and the global
recession that followed the second oil price shock caused international
trade to stagnate. At the same time, the United States began to feel
shifts in international competitiveness. By the late 1970s, many
countries, particularly newly industrializing countries, were growing
increasingly competitive in international export markets. South Korea,
Hong Kong, Mexico, and Brazil, among others, had become efficient
producers of steel, textiles, footwear, auto parts, and many other
consumer products.
As other countries became more successful,
U.S. workers in exporting industries worried that other countries were
flooding the United States with their goods while keeping their own
markets closed. American workers also charged that foreign countries
were unfairly helping their exporters win markets in third countries by
subsidizing select industries such as steel and by designing trade
policies that unduly promoted exports over imports. Adding to American
labor's anxiety, many U.S.-based multinational firms began moving
production facilities overseas during this period. Technological
advances made such moves more practical, and some firms sought to take
advantage of lower foreign wages, fewer regulatory hurdles, and other
conditions that would reduce production costs.
An even bigger factor leading to the
ballooning U.S. trade deficit, however, was a sharp rise in the value of
the dollar. Between 1980 and 1985, the dollar's value rose some 40
percent in relation to the currencies of major U.S. trading partners.
This made U.S. exports relatively more expensive and foreign imports
into the United States relatively cheaper. Why did the dollar
appreciate? The answer can be found in the U.S. recovery from the global
recession of 1981-1982 and in huge U.S. federal budget deficits, which
acted together to create a significant demand in the United States for
foreign capital. That, in turn, drove up U.S. interest rates and led to
the rise of the dollar.
In 1975, U.S. exports had exceeded foreign
imports by $12,400 million, but that would be the last trade surplus the
United States would see in the 20th century. By 1987, the American trade
deficit had swelled to $153,300 million. The trade gap began sinking in
subsequent years as the dollar depreciated and economic growth in other
countries led to increased demand for U.S. exports. But the American
trade deficit swelled again in the late 1990s. Once again, the U.S.
economy was growing faster than the economies of America's major trading
partners, and Americans consequently were buying foreign goods at a
faster pace than people in other countries were buying American goods.
What's more, the financial crisis in Asia sent currencies in that part
of the world plummeting, making their goods relatively much cheaper than
American goods. By 1997, the American trade deficit $110,000 million,
and it was heading higher.
American officials viewed the trade
balance with mixed feelings. Inexpensive foreign imports helped prevent
inflation, which some policy-makers viewed as a potential threat in the
late 1990s. At the same time, however, some Americans worried that a new
surge of imports would damage domestic industries. The American steel
industry, for instance, fretted about a rise in imports of low-priced
steel as foreign producers turned to the United States after Asian
demand shriveled. And although foreign lenders were generally more than
happy to provide the funds Americans needed to finance their trade
deficit, U.S. officials worried that at some point they might grow wary.
This, in turn, could drive the value of the dollar down, force U.S.
interest rates higher, and consequently stifle economic activity.

The American Dollar and the World Economy

As global trade has grown, so has the need for international
institutions to maintain stable, or at least predictable, exchange
rates. But the nature of that challenge and the strategies required to
meet it evolved considerably since the end of the World War II -- and
they were continuing to change even as the 20th century drew to a close.
Before World War I, the world economy
operated on a gold standard, meaning that each nation's currency was
convertible into gold at a specified rate. This system resulted in fixed
exchange rates -- that is, each nation's currency could be exchanged for
each other nation's currency at specified, unchanging rates. Fixed
exchange rates encouraged world trade by eliminating uncertainties
associated with fluctuating rates, but the system had at least two
disadvantages. First, under the gold standard, countries could not
control their own money supplies; rather, each country's money supply
was determined by the flow of gold used to settle its accounts with
other countries. Second, monetary policy in all countries was strongly
influenced by the pace of gold production. In the 1870s and 1880s, when
gold production was low, the money supply throughout the world expanded
too slowly to keep pace with economic growth; the result was deflation,
or falling prices. Later, gold discoveries in Alaska and South Africa in
the 1890s caused money supplies to increase rapidly; this set off
inflation, or rising prices.
Nations attempted to revive the gold
standard following World War I, but it collapsed entirely during the
Great Depression of the 1930s. Some economists said adherence to the
gold standard had prevented monetary authorities from expanding the
money supply rapidly enough to revive economic activity. In any event,
representatives of most of the world's leading nations met at Bretton
Woods, New Hampshire, in 1944 to create a new international monetary
system. Because the United States at the time accounted for over half of
the world's manufacturing capacity and held most of the world's gold,
the leaders decided to tie world currencies to the dollar, which, in
turn, they agreed should be convertible into gold at $35 per ounce.
Under the Bretton Woods system, central
banks of countries other than the United States were given the task of
maintaining fixed exchange rates between their currencies and the
dollar. They did this by intervening in foreign exchange markets. If a
country's currency was too high relative to the dollar, its central bank
would sell its currency in exchange for dollars, driving down the value
of its currency. Conversely, if the value of a country's money was too
low, the country would buy its own currency, thereby driving up the
price.
The Bretton Woods system lasted until
1971. By that time, inflation in the United States and a growing
American trade deficit were undermining the value of the dollar.
Americans urged Germany and Japan, both of which had favorable payments
balances, to appreciate their currencies. But those nations were
reluctant to take that step, since raising the value of their currencies
would increases prices for their goods and hurt their exports. Finally,
the United States abandoned the fixed value of the dollar and allowed it
to "float" -- that is, to fluctuate against other currencies.
The dollar promptly fell. World leaders sought to revive the Bretton
Woods system with the so-called Smithsonian Agreement in 1971, but the
effort failed. By 1973, the United States and other nations agreed to
allow exchange rates to float.
Economists call the resulting system a
"managed float regime," meaning that even though exchange
rates for most currencies float, central banks still intervene to
prevent sharp changes. As in 1971, countries with large trade surpluses
often sell their own currencies in an effort to prevent them from
appreciating (and thereby hurting exports). By the same token, countries
with large deficits often buy their own currencies in order to prevent
depreciation, which raises domestic prices. But there are limits to what
can be accomplished through intervention, especially for countries with
large trade deficits. Eventually, a country that intervenes to support
its currency may deplete its international reserves, making it unable to
continue buttressing the currency and potentially leaving it unable to
meet its international obligations.

The Global Economy

To help countries with unmanageable balance-of-payments problems, the
Bretton Woods conference created the International Monetary Fund (IMF).
The IMF extends short-term credit to nations unable to meet their debts
through conventional means (generally, by increasing exports, taking out
long-term loans, or using reserves). The IMF, to which the United States
contributed 25 percent of an initial $8,800 million in capital, often
requires chronic debtor nations to undertake economic reforms as a
condition for receiving its short-term assistance.
Countries generally need IMF assistance
because of imbalances in their economies. Traditionally, countries that
turned to the IMF had run into trouble because of large government
budget deficits and excessive monetary growth -- in short, they were
trying to consume more than they could afford based on their income from
exports. The standard IMF remedy was to require strong macroeconomic
medicine, including tighter fiscal and monetary policies, in exchange
for short-term credits. But in the 1990s, a new problem emerged. As
international financial markets grew more robust and interconnected,
some countries ran into severe problems paying their foreign debts, not
because of general economic mismanagement but because of abrupt changes
in flows of private investment dollars. Often, such problems arose not
because of their overall economic management but because of narrower
"structural" deficiencies in their economies. This became
especially apparent with the financial crisis that gripped Asia
beginning in 1997.
In the early 1990s, countries like
Thailand, Indonesia, and South Korea astounded the world by growing at
rates as high as 9 percent after inflation -- far faster than the United
States and other advanced economies. Foreign investors noticed, and soon
flooded the Asian economies with funds. Capital flows into the
Asia-Pacific region surged from just $25,000 million in 1990 to $110,000
million by 1996. In retrospect, that was more than the countries could
handle. Belatedly, economists realized that much of the capital had gone
into unproductive enterprises. The problem was compounded, they said, by
the fact that in many of the Asian countries, banks were poorly
supervised and often subject to pressures to lend to politically favored
projects rather than to projects that held economic merit. When growth
started to falter, many of these projects proved not to be economically
viable. Many were bankrupt.
In the wake of the Asian crisis, leaders
from the United States and other nations increased capital available to
the IMF to handle such international financial problems. Recognizing
that uncertainty and lack of information were contributing to volatility
in international financial markets, the IMF also began publicizing its
actions; previously, the fund's operations were largely cloaked in
secrecy. In addition, the United States pressed the IMF to require
countries to adopt structural reforms. In response, the IMF began
requiring governments to stop directing lending to politically favored
projects that were unlikely to survive on their own. It required
countries to reform bankruptcy laws so that they can quickly close
failed enterprises rather than allowing them to be a continuing drain on
their economies. It encouraged privatization of state-owned enterprises.
And in many instances, it pressed countries to liberalize their trade
policies -- in particular, to allow greater access by foreign banks and
other financial institutions.
The IMF also acknowledged in the late
1990s that its traditional prescription for countries with acute
balance-of-payments problems -- namely, austere fiscal and monetary
policies -- may not always be appropriate for countries facing financial
crises. In some cases, the fund eased its demands for deficit reduction
so that countries could increase spending on programs designed to
alleviate poverty and protect the unemployed.

Development Assistance

The Bretton Woods conference that created the IMF also led to
establishment of the International Bank for Reconstruction and
Development, better known as the World Bank, a multilateral institution
designed to promote world trade and economic development by making loans
to nations that otherwise might be unable to raise the funds necessary
for participation in the world market. The World Bank receives its
capital from member countries, which subscribe in proportion to their
economic importance. The United States contributed approximately 35
percent of the World Bank's original $9,100 million capitalization. The
members of the World Bank hope nations that receive loans will pay them
back in full and that they eventually will become full trading partners.
In its early days, the World Bank often
was associated with large projects, such as dam-building efforts. In the
1980s and 1990s, however, it took a broader approach to encouraging
economic development, devoting a growing portion of its funds to
education and training projects designed to build "human
capital" and to efforts by countries to develop institutions that
would support market economies.
The United States also provides unilateral
foreign aid to many countries, a policy that can be traced back to the
U.S. decision to help Europe undertake recovery after World War II.
Although assistance to nations with grave economic problems evolved
slowly, the United States in April 1948 launched the Marshall Plan to
spur European recovery from the war. President Harry S Truman
(1944-1953) saw assistance as a means of helping nations grow along
Western democratic lines. Other Americans supported such aid for purely
humanitarian reasons. Some foreign policy experts worried about a
"dollar shortage" in the war-ravaged and underdeveloped
countries, and they believed that as nations grew stronger they would be
willing and able to participate equitably in the international economy.
President Truman, in his 1949 inaugural address, set forth an outline of
this program and seemed to stir the nation's imagination when he
proclaimed it a major part of American foreign policy.
The program was reorganized in 1961 and
subsequently was administered through the U.S. Agency for International
Development (USAID). In the 1980s, USAID was still providing assistance
in varying amounts to 56 nations. Like the World Bank, USAID in recent
years has moved away from grand development schemes such as building
huge dams, highway systems, and basic industries. Increasingly, it
emphasizes food and nutrition; population planning and health; education
and human resources; specific economic development problems; famine and
disaster relief assistance; and Food for Peace, a program that sells
food and fiber on favorable credit terms to the poorest nations.
Proponents of American foreign assistance
describe it as a tool to create new markets for American exporters, to
prevent crises and advance democracy and prosperity. But Congress often
resists large appropriations for the program. At the end of the 1990s,
USAID accounted for less than one-half of one percent of federal
spending. In fact, after adjusting for inflation, the U.S. foreign aid
budget in 1998 was almost 50 percent less than it had been in 1946.